All of the coloured font below are STRUCK OUT of the new OBSI terms of reference. That means that OBSI is forced to ignore or not investigate the systemic abuses, victimizations or crimes of Canada's financial service providers. FREE MONEY.........

“Systemic Issue” means a matter such as undisclosed fees or charges, misleading communications, administrative errors or product flaws discovered in the course of considering a Complaint against a Participating Firm which may have caused loss, damage or harm to one or more other Customers of the Participating Firm in a similar fashion to that experienced by the original Complainant;

11. The Ombudsman may identify potential Systemic Issues in the course of dealing with individual complaints, and shall investigate them in the following manner:￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼(e) (f)(g)(i) (ii)(i) (ii)if a potential Systemic Issue is identified, OBSI will request the Participating Firm to investigate and report on its investigation to the Ombudsman;if a Systemic Issue is confirmed by the Participating Firm, the Ombudsman will:offer to work with the Participating Firm to find a fair resolution; andrecommend in appropriate circumstances the Participating Firm compensate all affected individuals or small businesses and take steps to prevent a future occurrence of the issue;if a Systemic Issue is not found by the Participating Firm and that finding is disputed by the Ombudsman, or a recommendation under section 11 (b)(ii) is rejected:the Ombudsman will refer the matter to the Participating Firm’s regulator; andOBSI shall report on a “no-names” basis on the matter in its Annual Review;a failure by the Participating Firm to co-operate in the investigation of a potential Systemic Issue shall be reported to the Participating Firm’s regulator; andmatters which in the judgement of the Ombudsman involve potential regulatory or criminal breaches will, in appropriate circumstances, be referred to the appropriate regulatory or law enforcement agency.

The image below is my own personal observation (from twenty years inside Canada's investment industry) of how executives, managers and sales-types, feel and treat this great win:

Toronto – The Canadian Securities Administrators (CSA) today published final amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. These amendments would require all registered dealers and advisers to use the Ombudsman for Banking Services and Investments (OBSI) as the common dispute resolution service (DRS), except in Québec where the mediation regime administered by the Autorité des marchés financiers will continue to apply.

Requiring that OBSI’s independent dispute resolution services be made available to clients is an important component of the CSA’s investor protection framework. The CSA have determined it is appropriate to mandate this requirement for exempt market dealers and portfolio managers, which CSA members directly oversee. Today’s amendments now hold all registered dealers and advisers (outside of Québec) to the same requirement. Self-regulatory organizations (SROs) had already mandated their members to make OBSI’s DRS available to their clients and this requirement will continue to apply.

“Mandating all registered dealers and advisers to offer dispute resolution services through OBSI is in the best interest of both investors and registrants. Customer complaints will be held to an independent and uniform standard that will establish a level playing field in terms of service levels, costs and outcomes,” said Bill Rice, Chair of the CSA and Chair and CEO of the Alberta Securities Commission.

The CSA is committed to continue its work with OBSI to ensure it has the capacity to effectively discharge its mandate. Published today, participating CSA members and OBSI have entered into a memorandum of understanding (MOU) that creates an oversight framework for OBSI to meet the standards set out by the CSA.

Included in the MOU is a commitment to an independent evaluation of OBSI’s operations and practices within two years of the amendments coming into force and a requirement that OBSI have a fair, transparent and appropriate process for setting fees and allocating costs across its membership.

The amendments to NI 31-103 come into force May 1, 2014, to allow for ministerial approvals required in some jurisdictions. There will be a three-month transition period for registered firms who are not currently OBSI members to comply with the amendments. The transition period will end August 1, 2014. The amendments and the OBSI MOU can be found on CSA member websites.

The CSA, the council of the securities regulators of Canada’s provinces and territories, coordinates and harmonizes regulation for the Canadian capital markets.

Ombudsman launches consultation on terms of reference following new regulations for resolving banking disputesBy James Langton | June 12, 2013 11:15

The Ombudsman for Banking Services and Investments (OBSI) is proposing to give up its ability to investigate so-called "systemic issues", among a variety of other possible changes to its terms of reference.

OBSI launched a consultation Wednesday on a series of proposed changes to the terms of reference that set out its mandate, powers and duties. Among the proposals, OBSI is planning to surrender its ability to expand investigations from an individual client with a complaint in cases where it believes that an issue may have affected a large number of clients.

The move comes in response to new regulations for resolving banking disputes that were set by the federal department of Finance last year. According to OBSI's proposals, those rules require any potential systemic issues to be referred to the federal financial regulator, the Financial Consumer Agency of Canada (FCAC) for investigation.

So, in order to comply with those requirements, OBSI is giving up its ability to investigate systemic issues on the banking side; and, for the sake of consistency, it has also decided to drop that power for investment industry complaints too. "OBSI's board believes that there should be one policy on systemic issues for the entire organization, and the decision by the Department of Finance has necessitated this policy change," it says, adding that securities regulators support this position too.

Some of the other proposed changes include clarifying that it will not investigate any complaint involving segregated funds, referring these issues to the Ombudservice for Life and Health Insurance (OLHI); describing the circumstances where it will accept complaints beyond its typical 180-day deadline; establishing conflict of interest policies; clarifying that clients can pursue complaints in other venues for compensation beyond OBSI's $350,000 limit; and, formalizing its process for "naming and shaming" firms that refuse its recommendations.

It also aims to clarify that its jurisdiction involves making recommendations against firms, even though losses involved are often caused by an individual rep. "Whether the firm then goes back to the representative to try to recover any compensation paid is a business decision for the firm to make and is not part of OBSI's process," it says, noting that the courts have established that investment firms are vicariously liable for the actions of their investment advisors.

And, it also establishes that OBSI will continue to report to firms any threats against them that come to light during an investigation, but that it will now be keeping the identity of the OBSI staffer who reported the threat confidential. It says it's making this change because of several incidents over the years in which OBSI staff have reported these sorts of threats to firms, and have then themselves been exposed to threats from the complaining clients who made the initial threats against the firm. "OBSI believes proper protections for its own staff should be in place if we are to provide this information to firms," it says.The proposed changes are out for comment until August 12.

The rules will require banks to belong to a federally approved external complaints body, starting in September, where consumers can go if they are unable to resolve their issues directly with the bank.But that doesn't mean there will be a single, national body to field such complaints.New Democrat consumer critic Glenn Thibeault said the new rules will instead create a free-for-all complaints system, allowing the banks to pick and choose who fields the grievances.

The rules permit the banks to select whomever they want to work as a complaints overseer, so long as that body is approved by the Financial Consumer Agency of Canada (FCAC), Thibeault said.

"Rather than having an independent kind of third-party single banking dispute resolution, you have what we're calling the Wild West of providers," he said."The banks can now hire whoever they see fit to actually be their dispute resolution mechanism."

The Public Interest Advocacy Group has also warned that having multiple complaints structures will lead to confusion among consumers and lead to inconsistent results.Until recently, last-resort consumer complaints about the banks were heard by the Ombudsman for Banking Services and Investment (OBSI), a non-profit complaints agency financed by industry members after its creation in 1996.But the two biggest banks, RBC and TD, pulled out of the agency and instead hired a private mediation firm, ADR Chambers, to handle their consumer complaints.

It was that action that effectively allowed the banks to select their own external complaints body, with no minimum standards and no guarantees for consumers, leading to uncertainty and uneven expectations of outcomes, said Flaherty.

“This new oversight, in tandem with additional compliance monitoring of the complaint system by FCAC, brings needed transparency and rigour to the complaint-handling process, so Canadians can expect faster, more effective recourse when issues arise."The banking ombudsman expects to be granted approval as a complaints service provider to the banks, agency spokesman Tyler Fleming said Thursday."We already meet or exceed all of the requirements," he said. "We'll be submitting our application in September."OBSI also deals with complaints about the investment sector, representing consumers on behalf of about 600 firms including mutual fund dealers and group scholarship providers, and is hoping to expand its reach through provincial securities regulators.The new regulations, taking effect Sept. 2, will require banks and other federally regulated financial institutions to maintain staff and procedures to handle consumer complaints through internal processes.

If a complaint is not resolved, consumers will be given the option to contact an external complaints body associated with the financial institution.The banks, and the external complaints bodies, will also be required to publicly issue annual reports detailing the number and nature of complaints they received and investigated.

(advocate comments: HEADS THE BANKS WIN, TAILS THE CUSTOMER LOSES? Canada's banks (and ADVOCIS life insurance sellers) prefer to use their own kangaroo court system of "self" regulators, and failing that you can take them to court if you have ten years of your life to waste and can afford a couple hundred grand. Is it wise to deal with those who act more like legal bullies when a complaint occurs? )

The financial services industry has many concerns about giving OBSI more power and its campaign to "name and shame" firmsBy James Langton | April 2013The financial services industry certainly has been critical of the Ombudsman for Banking Services and Investments (OBSI) and doesn't back the regulators' proposal to declare OBSI the sole dispute-resolution mechanism for all firms. Yet, there also is broad support for giving OBSI tougher enforcement powers.Investment Executive (IE) sought the industry's views on the current state of dispute resolution in two supplemental questions in our 2013 Regulators' Report Card and found that, by and large, what the industry truly wants is a more effective ombudservice.After operating in the background for years, OBSI has come under increasing criticism from the industry over the past couple of years - and it's facing growing resistance to its recommendations. Late last year, amid mounting intransigence from the industry, OBSI felt compelled to deploy its only enforcement power - publicly naming firms and detailing their cases - against several firms in cases in which OBSI was unable to get those firms to accept its recommendations.

Around the same time, the Canadian Securities Administrators (CSA) proposed that all firms be required to use OBSI to resolve customer disputes. Currently, only firms that belong to the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) are obliged to use OBSI.

Although some other types of securities firms (such as exempt-market dealers and scholarship plan dealers) use OBSI's services, the CSA proposal would make it mandatory for all firms. The goals are to minimize confusion for clients and shore up OBSI's status.

Yet, those surveyed by IE were split over whether this is a good idea. When compliance officers (COs) and company executives were asked whether they are in favour of the CSA's proposal, 60% of those who answered said, "No." If those who declined to offer an opinion (almost 25% of those surveyed) are included, slightly less than half of survey respondents were against the CSA's proposal and about one-third supported it.

Among those who objected to the CSA's plan, the reasons most often cited included the belief that OBSI doesn't understand the industry well enough; the belief that OBSI is biased in favour of clients; and the preference that no organization be given a monopoly over this aspect of the business."I'm totally against this proposal," says a CO with an Ontario-based mutual fund dealer. "Banks are fighting to avoid it. And if they are finding reasons to get out, then imagine what it's like for small companies."

Indeed, OBSI suffered the withdrawal of a second big bank in late 2011 and saw the federal government refuse to mandate bank participation in OBSI's service last year in the finalized rules for bank-related dispute resolution.However, opposition to the CSA proposal to mandate participation for all securities-related firms was far from unanimous; in fact, a healthy share of survey respondents supported the idea.

In particular, supporters cited the benefit of streamlining the dispute-resolution process and making it easy for clients to navigate. Some survey respondents also objected to the idea that firms should be able to choose, and pay, the organization that would serve as the judge in their disputes with clients - effectively, the approach that the federal government has endorsed for the banks."It's not fair to allow banks to hire their own dispute-resolution [service] because it's a conflict of interest," says an executive with an Ontario-based mutual fund dealer. "The CSA's proposal is one way to avoid that."

Although there was no unanimity on whether the CSA proposal makes sense, both sides of the issue apparently believe some reform at OBSI is needed.For example, one respondent who objects to the CSA proposal and doesn't like the idea of OBSI being the last word on customer disputes suggested there needs to be an appeal process.Another respondent who supports the CSA proposal added a caveat: "I've heard there is a lack of industry knowledge among [OBSI's] investigators, so that should be addressed."Another major area in which the industry would like to see some changes is in OBSI's reliance on "name and shame" as its only recourse when a firm refuses one of OBSI's recommendations.IE specifically asked survey respondents whether they believe that the recent spate of "name and shame" actions has been effective. Of those who answered the question, 77% said, "No." Overall, almost 30% declined to answer and just 17% said that it has worked."For a dispute to get to that point - that a firm absolutely refuses to comply - it's because [the firm] believes it's in the right," says a CO with an Ontario-based fund-management firm that also is an exempt-market dealer. "Then, all OBSI can do is threaten to tell on [the firm]. I don't think it's a workable model."Indeed, the industry doesn't have much faith in the "name and shame" process. Some survey respondents said it's just not effective because clients aren't aware of it, while other respondents worried that it's a punishment that really can hurt only a small firm because a big dealer isn't going to feel the impact. And some respondents said that this practice taints the industry overall and doesn't stick to the firm in question.Yet, despite this widespread skepticism about OBSI's role, there also was a strong sense that the ombudservice needs the ability to enforce its decisions."'Name and shame' is such an unprofessional way of resolving a complaint," says a CO in Ontario with a mutual fund dealer. "OBSI would be more effective if it had the power to enforce its rulings."Of course, the industry doesn't simply want OBSI empowered to enforce decisions in its current state; it needs greater oversight."[OBSI] needs a way to enforce its decisions," says a dealer in the Maritimes. "But I have heard the concerns about its process, and I think that should be examined."The industry may not be happy with OBSI, the regulators' plan to make the service mandatory or OBSI's "name and shame" power, but what industry players appear to want is an ombudservice that has both the power and the ability to resolve disputes.

After TD Bank and RBC unilaterally "opts out" of the industry mandated Ombudsman (OBSI) because they OBSI people calculated settlements for abused clients that included "lost opportunity" calculations (a little too FAIR??)........these two banks went and hired their own private referee service. ADR Chambers is a respected group of retired judges (or similar) who have a private commercial mediation business.

For these two banks to remove themselves from a system by which all participants in the industry were agreed to use (OBSI) is a true slap in the face for objective justice in the view of many.

But.......the good news is that with their new, privately hired service, they can now close your complaint file in a far shorter time, as the enclosed report alludes to. I am not certain that closure of the file is what many financial victims are seeking.......but it seems to work for the banks:)

OBSI calling out firms will only work if there is enough "shame"By James Langton | December 2012

After more than a year of trying to hash out a solution, the Ombudsman for Banking Services and Investments (OBSI) has reluctantly begun "naming and shaming" firms that are refusing to comply with its compensation recommendations. It's a step that may fundamentally determine the dispute-resolution service's future.The ability to call out publicly the firms that decline to follow OBSI's recommendations is the ombudservice's only real enforcement power, and yet it has rarely been used. (For more, see pages 27 and 30.)Until now, the ombudservice has had its hand forced this way only once before. In 2007, a mutual fund dealer was outed for refusing to comply with OBSI's recommendation.But, in November, OBSI announced two more refusals and warned that there may be more to come. The decision to start "naming and shaming" firms comes almost a year after securities regulators called on OBSI to try to resolve 21 so-called "stuck" complaints, in which firms were refusing to comply with OBSI's recommendations.

Since then, about a third of those complaints have been settled. Only one of the firms involved has taken OBSI up on its offer for an independent review of these cases in order to determine whether OBSI's investigation or conclusions are flawed. The rest of those cases remain stuck.

And so, OBSI is resorting to naming the firms involved and publishing its investigation reports — a move that doesn't get the clients their money back, but, OBSI hopes, may deter other firms from refusing its recommendations in the future.

"The publicity will hopefully play a role in settling some cases," notes Tyler Fleming, director of stakeholder relations and communications with OBSI. "But there are others where discussions have resumed recently after we notified them we were moving to publish and informed the regulators."

In the two cases so far in which OBSI has given up hope of settling, the ombudservice has announced: Toronto-based investment dealer Octagon Capital Corp. refused to follow OBSI's recommendation that Octagon compensate an aggrieved inves-tor to the tune of $181,339; and Markham, Ont.-based mutual fund dealer W.H. Stuart and Associates (WHS) declined to comply with a $41,066 compensation recommendation.

Neither firm has commented on OBSI's move. But, in both cases, the investigation reports published by OBSI indicate that the clients in question were victimized by rogue reps.

The rep involved in the Octagon case was sanctioned by the Investment Industry Regulatory Organization of Canada for making unsuitable recommendations and engaging in unauthorized trading. As for the WHS case, the rep was criminally convicted for theft involving a pyramid scheme that resulted in large losses to clients.

Nevertheless, in both cases, OBSI concluded that the clients were unsuitably invested, and that the firms are liable for their losses. But with the firms refusing to agree to OBSI's recommendations, the ombudservice's only option is to "name and shame" these firms.

This is a significant step for the clients, who now are unlikely to see any compensation, and the firms, which will suffer the bad publicity — but, perhaps most of all, for OBSI itself, as it will probably reveal whether this sanction has any significance at all.

In the wake of the first announcement, investor advocacy group the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) cautioned investors against dealing with firms that refuse OBSI's recommendations: "Stakeholders in the financial markets [including consumers] need to consider ‘cold shouldering' a firm that is named and shamed, meaning that they decline to do business with them. This is how ‘name and shame' is given bite. [If that doesn't happen,] the effectiveness of ‘name and shame' is undermined."

Indeed, an independent review of OBSI that was carried out last year by the Melbourne, Australia-based Navigator Co. Pty. Ltd., concluded that fundamental reforms are necessary for OBSI to retain its credibility and effectiveness. Among other things, it called for OBSI to have the power to enforce its decisions, not simply to "name and shame."

A GREAT RISKPhil Khoury, managing director of Navigator, who wrote that independent review of OBSI, says that OBSI's decision to start naming and shaming firms, "absolutely illustrates the case for OBSI to have binding powers, which in turn would require some of the other accompanying ‘protective' recommendations, such as an appeal mechanism, governance reforms, etc.

"‘Name and shame' only works if there is enough shame," he adds. "The great risk for any ‘name and shame' regime is that the naming becomes too commonplace for the ‘shame' to have any serious, lasting impact on firm reputations."

If firms begin refusing OBSI's recommendations routinely, Khoury adds, "[OBSI's] credibility and ability to operate effectively will be seriously damaged."And the harm will not be felt by just clients whose compensation recommendations are refused.

Khoury warns that "consumers will inevitably start accepting low-ball settlement offers" rather than run the risk of a refusal. More firms will play hardball with OBSI, too, he suggests, "using delaying tactics, resisting requests, making low-ball offers." Indeed, he warns, if "name and shame" proves ineffective, the whole system will suffer.

Yet, so far, Canadian regulators have yet to address most of the Navigator report's recommendations — although, in mid-November, the Canadian Securities Administrators (CSA) published proposed amendments that would require all firms under its jurisdiction to use OBSI to deal with client complaints.Currently, only investment dealers and mutual fund dealers are required to use OBSI; other firms do so voluntarily. The CSA's proposed reforms would require exempt-market dealers, education scholarship plan dealers and portfolio managers to use it to resolve their client complaints, too.To date, this is the only concrete measure the regulators have taken in the wake of the Navigator report. But this test of "name and shame" may now dictate whether they need to go further. IE

Given some of the abuses suffered by customers of the banking and financial services industry, no person of reasonable intelligence would deny there’s a place for an external body to resolve bank-related disputes.

In 1996 Ottawa set up such a body, the Ombudsman for Banking Services, to perform such a task, a task undertaken after the client and an institution have tried but failed to reach a satisfactory result.

Over time, OBSI, home to about 600 participating organizations, has resolved hundreds of matters even if a common criticism is that it takes too long to do the work and get a resolution.

Another criticism is that once a resolution is reached, it amounts to little more than recommendations, meaning OBSI, just like the guy with a knife at a gun fight, is essentially powerless to collect for the client. Over time, that lack of power has emerged as a structural flaw in the system, leaving some to conclude OBSI was set up to fail, or at least not be very effective. While OBSI is not a regulator, a reasonable person would argue it needs to armed to have a chance. (That lack of real power occurs at some financial regulatory bodies which have no ability to collect penalties from people who have committed transgressions while working in the industry but are now outside the industry.)

Accordingly, to make good on its recommendations, OBSI needs something more than the ability to “name and shame” the offending institution: some institutions are prepared to take the reputational risk because they feel the process is unfair as is the way restitution is calculated.

That lack of concern about reputational risk has been in evidence on three recent occasions. The latest played out Friday when OBSI named Macquarie Private Wealth as refusing compensation recommendations it made on two investigations: one for $74,791 (that covered matters from June 2005 to June 2008) and the other for $157,274 (that covered the period Sept. 2000 to April 2009.) Macquarie objected:

• Over the periods for the investigations, Macquarie did not have an operation in Canada. It came here in 2010 when it acquired the former Blackmont Capital. Macquarie bought that firm from CI Financial which had acquired Blackmont a few years earlier. The base for all these acquisitions was the retail arm of Yorkton Securities.

• It had nothing to do with the matters under investigation (which were filed in early 2010) because the brokers in question never worked for Macquarie and the affected clients were never clients of Macquarie. OBSI disagreed, saying “throughout the relevant time period, the investment dealer remained the same and the responsibility to compensate the customers rests with the investment dealer; merely the name changed.”

• Macquarie argues that when it bought Blackmont, it didn’t sign a blank cheque for all the liabilities. Instead it worked out a deal, indeed its the standard practice, whereby CI would indemnify Macquarie for certain matters, including claims brought against former employees. Accordingly Macquarie argued OBSI should go and talk to CI first and get them to pay up. It’s understood CI also objected in part because of the way the restitution formula is determined.

• The way the restitution formula is calculated. Macquarie argues the amount recommended bears little relationship to the capital loss incurred from the inappropriate advice.

OBSI said Friday ”we believe the clients were owed compensation but Macquarie refused to pay. The bulk of our investigations get resolved fairly,” adding that settlements have been reached since “name and shame” was implemented.

For the second time in its 16-year history, the Ombudsman for Banking Services and Investments (OBSI) has used its power to name a member firm that rejected its recommendation to compensate a client.

Octagon Capital Corp., based in Toronto, was asked to pay $181,339 to cover the losses of a client whose adviser put her into high-risk securities, despite her scanty investment knowledge and experience.

Mrs. B, a widow then in her 60s, was primarily a low-risk investor and needed income from her investments to last her lifetime, OBSI said.

Her adviser at Octagon “traded frequently in her accounts and often without her authorization. The securities he purchased were too risky for her, as were the margin and short selling strategies he used.”

Octagon is responsible for the adviser’s unsuitable recommendations and for its own compliance deficiencies that led to Mrs. B’s unsuitable investment portfolio at the firm, OBSI said in a news release.

John Palumbo, chief executive at Octagon Capital (established in 1993), said he had no comments on the OBSI release.

A Toronto mutual fund dealer, Financial Architects, was the first to defy an OBSI recommendation in 2007. It was asked to pay $79,797 to a 76-year-old widow for engaging in unsuitable investments and a risky strategy that left her short of needed income for her retirement.

Set up in 1996 to deal with banking complaints, OBSI expanded to cover investment complaints in 2002. It is funded by more than 600 member firms.

While OBSI can’t force firms to follow its recommendations, it can publicize their refusal to compensate clients and the investigator’s findings.

“We expect to be announcing several refusals by investment firms in the coming weeks and months,” the ombudsman said a day before it released details of the Octagon Capital complaint.

“The cases in question have been stuck at an impasse for a long time, which is unfortunate.”

Some lawyers aren’t happy with OBSI’s decision to go public about several unresolved complaints at the same time.

“The blackmailing principle is a bad idea for the Street,” said Ellen Bessner, a lawyer with Cassels Brock in Toronto. “It’s refreshing to see some of the companies stand up to OBSI.”

Harold Geller, an Ottawa lawyer who represents investors, supports the ombudsman model. But he wants to change OBSI’s mandate to be binding on industry players with a limited appeal to specific appeal body.

Douglas Melville, OBSI’s chief executive, said in an interview that the Octagon case was “a very familiar profile in the work we do.”

Many investment complaints revolve around an older client with limited investment knowledge and an adviser who chooses unsuitable investments without going through an appropriate process to understand their needs.

Mrs. B’s adviser completed an application form to indicate she had good investment knowledge and was willing to take high risk with 25 per cent of her investments — an assessment OBSI felt was false.

“Octagon allowed Mrs. B’s accounts to be unsuitably invested and traded, even relative to the inaccurate form Mr. H completed, let alone against the investment parameters that would have been suitable in the circumstances,” OBSI said.

“It appears to have done little or nothing to identify or address the suitability problem.”

The adviser had his registration suspended by the Investment Industry Regulatory Organization of Canada (IIROC) last December. He was fined $125,000 because of unsuitable trading in the client’s account.

Named as Randal William Harding in the IIROC report, he is no longer in the investment industry. He did not show up at the hearing.

Questioning the hundreds of trades that took place in the client’s account, IIROC said the adviser had earned $17,861 in commissions for transactions during the four-year period.

Something is wrong when a client is denied the recommended compensation after a rigorous investigation. Many other clients are in the same boat.

Let’s hope that Canada’s securities regulators review the ombudsman model and make changes to avoid this happening in the future.

Since our organization’s inception in 1996, only one firm has ever refused an OBSI recommendation to compensate a client regarding a complaint we investigated. Now, after a lengthy process aimed at trying to fairly resolve certain cases, we expect to be announcing several refusals by investment firms in the coming weeks and months.

A firm’s refusal to compensate means that OBSI must publicize the refusal as well as our investigation’s findings under the so-called ‘name and shame’ requirements of Section 27 of our Terms of Reference. It is the principal tool that OBSI has to incent firm cooperation, but it was never meant to be used. Some have likened it to a nuclear deterrent.

The cases in question have been stuck at an impasse for a long time, which is unfortunate. While we were in a position to have publicized the details some time ago, if OBSI announces a refusal to compensate it is the end of our process. It means that someone, a client of an investment firm or bank, will not receive the compensation they are fairly owed based on the facts of the case.

Recognizing this, we have taken some extraordinary steps in an effort to break through the logjam (we outline some of these steps below.) Our only interest is in finding fair resolutions to these “stuck complaints”.

In many cases, OBSI’s efforts succeeded. Although the complaints dragged on, in the end some firms agreed to settlements and their customers were satisfied that their complaints were resolved fairly.

In other cases, however, firms simply have not agreed to compensate their customers for the firm’s own mistakes, liabilities and compliance deficiencies. Having exhausted all avenues to settle these complaints, OBSI is now preparing to publicize the refusals.

We remain hopeful that the cases will yet resolve before we announce them as refusals to compensate. The reality is that the overwhelming majority of complaints brought to OBSI are resolved in a manner we believe is fair: fully 99.8% since our organization’s inception. Unfortunately, the coming period will likely focus significant attention on those cases that could not be resolved, as well as the firms involved.

BACKGROUND

As noted above, OBSI has taken some extraordinary steps to resolve the cases stuck at an impasse. These steps include:

Consultation on OBSI’s methodologyExpert assessmentIndependent review of the case filesEscalation within the firm

Consultation on OBSI’s methodology: OBSI undertook a comprehensive consultation on our investment suitability and loss assessment methodology. We did this in part because the majority of investment complaints that we investigate each year revolve around questions of investment suitability and there had been criticism of our approach from certain securities firms. While firms may agree with all or part of OBSI’s process, when there is not agreement it can lead to significant delays in resolving client complaints. This was an issue in the overwhelming majority of the stuck cases.

While these consultations were ongoing, we felt it would be unfair to the firms if we published their refusals. The process we had followed in their case, as well as the method used to calculate compensation owed to the investor, had the potential to be modified in a material way as a result of the consultations.

Now, that consultation process has concluded with a series of enhancements having been made to OBSI’s investment suitability and loss assessment methodology.

Expert assessment: As part of its Framework for Collaboration with financial market regulators, OBSI must submit itself to knowledgeable, independent third party evaluations on a regular basis. The Navigator Company of Australia, which reviewed OBSI in 2007, was engaged by OBSI’s Board of Directors, with the agreement of financial regulators, to review OBSI once again in 2011. Navigator has extensive experience in this field, having reviewed eight different financial dispute resolution schemes around the world – several of them multiple times – as well as having conducted similar reviews of several non-financial dispute resolution schemes.

Industry participants met with the reviewer to outline their concerns with OBSI. The reviewer specifically asked firms that voiced concerns about OBSI to submit actual complaint files, including OBSI correspondence and findings, for review in order to validate their concerns. Only a few firms took up this offer. The reviewer also looked at dozens of files chosen randomly from OBSI’s case inventory.

The case file review found that OBSI’s methods and conclusions were fair, rigorous, appropriate and consistent across files.

OBSI’s Board of Directors also specifically tasked the independent reviewer with conducting a detailed examination of the investment suitability and loss assessment methodology as part of the larger report. The reviewer found that in many respects OBSI ‘s methodology is the gold-standard amongst its international peers in terms of the fairness and precision of the loss calculation.

Independent review process: At the end of October 2011 OBSI received a letter from the Canadian Securities Administrators (CSA), the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA) concerning the resolution of twenty-one complaints considered to be stuck at impasse as of the date of the letter (several have since been resolved).

At the direction of the regulators, OBSI identified a one-time method of independent review of these cases with a view to bringing them to a resolution. Firms were offered the opportunity to have credible and experienced former commissioners of the Ontario Securities Commission (OSC) provide an independent assessment of the files in question, at the firms’ expense, based on standards consistent with OBSI’s Terms of Reference. If OBSI had unfairly considered the facts of the case or our investigation findings were objectively flawed, the reviewer would say so in his or her report on the matter. As of today only one firm has taken up this offer and the review is ongoing.

Escalation within the firm: We recognize that sometimes senior management at a firm is unaware of the complaints about their firm that are in OBSI’s office and at an impasse, even when involving large dollar amounts. On occasion, it is not until we have been about to go public with a refusal to compensate that the firm changed its mind.

It is OBSI’s goal to allow firms plenty of time to resolve cases at the appropriate level before we announce a refusal. OBSI’s escalation process is as follows:

Following OBSI’s investigation, a draft recommendation is provided to the participating firm laying out OBSI’s findings and providing the basis for that recommendation. The participating firm and the complainant are provided with 30 days to comment on the draft recommendation. Any comments received are considered and factored into the final recommendation.Once a final recommendation is issued to a participating firm, OBSI will follow-up with the designated contact person at the firm to obtain the participating firm’s decision to accept or reject the recommendation.If the recommendation has been refused, the Ombudsman will contact a senior executive of the firm (often the CEO) to inform them of the refusal, the implications of it, and the next steps to be taken. The senior executive is encouraged to contact the Ombudsman to discuss the refusal. At this point, OBSI is free to discuss the matter publicly.OBSI’s Board of Directors is informed of the refusal and the facts of the case, including the name of the firm.The appropriate regulators are informed of the refusal and the name of the firm.The firm is provided with three hours notice before a news release announcing the refusal is published.

Response to proposed reforms in banking dispute resolutionThe Government of Canada in its Budget 2010 committed to strengthening the dispute resolution framework for banks and authorized foreign banks by establishing minimum standards required for institutions' complaints procedures. By the summer of 2012 the Department of Finance released for comment its proposed approach and instructed the Financial Consumer Agency of Canada to take certain steps to consult publicly concerning the supervision of the processes and rules governing banking dispute resolution.

Consumers deserve fair, independent resolution of disputes with banksPublic debate about how best to offer consumers both dispute resolution and redress has been stimulated by the withdrawal of two banks from an industry created external dispute resolution body, the Ombudsman for Banking Services and Investments, which has gained growing credibility with consumer organizations for fairness and independence.

Get past the "spin" and learn more about this complex issueThe Consumers Council of Canada has prepared a "Consumer Perspectives 360º Report" entitled "Canada's Banking Dispute Resolution System" which all interested in the subject are encouraged to read. [Download: PDF | EPUB] This report will help Canadian consumers understand the history of this important but complex consumer protection issue and to clarify misunderstandings confusing the public debate about it. For example, some media reports have characterized OBSI as a public sector solution to providing dispute resolution, when it is actually a child of the banking industry itself. The fast and furious "spin"of this issue has made it more important than ever to review the facts.

Steps government can take to protect consumers nowWith changes seemingly imminent and because of deep concerns about hurried change leading to adverse, unintended and other consequences for consumers, the Council in August 2012 advised the Department of Finance and Financial Consumer Agency of Canada of its current recommendations concerning dispute resolution in banking:

A single, regulated independent external provider with a strong governance process is the best way to deliver banking dispute resolution and redress to consumers.The approach to independent external consumer dispute resolution and redress taken by major banks such as Bank of Montreal, Canadian Imperial Bank of Commerce and Scotiabank by using the services of the Ombudsman for Banking Services and Investments (OBSI) as is now constituted better protects the rights of consumers and makes it easier for consumers to manage their responsibilities than does the alternative method offered by the Royal Bank of Canada and TD Bank since they stopped using the services of OBSI.The approach to independent external consumer dispute resolution and redress taken by the Royal Bank of Canada and TD Bank does not meet agreed-upon minimum standards, has not had an appropriate level of involvement in its development by consumers, government regulators or industry self-regulators, and has not been the chosen option of most banks operating in Canada, nor organizations representing consumers and investors.Regulatory change respecting independent external consumer dispute resolution and redress announced for public consultation by the Department of Finance will require a lengthy and detailed process, with much public input, to reach fair outcomes for consumers, especially because the agency responsible, the Financial Consumer Agency of Canada, is being called upon to adapt to new responsibilities and additions to its mandate to provide consumer protection and because the Department of Finance is assuming a new accountability to the public in approving dispute resolution service providers. Good regulatory work concerning complex matters takes time.Consumers deserve the best available (even an acceptable) process of independent external consumer dispute resolution and redress NOW – not just in some unforeseeable future – so all banks should be required to participate in the Ombudsman for Banking Services and Investments at this time.FCAC's first priorities if there is to be change should be to: (1) assert its new responsibility and assume its new responsibility for improving the internal dispute resolution of banks and (2) develop its processes for monitoring dispute resolution and redress decisions and related compliance and for monitoring and responding to systemic issues identified in both internal and external dispute resolution processes.Independent, peer reviewed research should be conducted to determine the resource levels the FCAC will need to perform effectively its proposed new mandate overseeing internal and external dispute resolution processes and systems of redress and managing systemic issues adversely affecting consumers that have been reported to it or that it has identified.A public consultation or consultations, open to individuals and in which groups representing consumers are appropriately financially supported as intervenors, should be undertaken to develop the standards, rules and penalties to be used by FCAC in its supervision of banking dispute resolution. FCAC and the Department of Finance should determine ways to fund the participation of independent intervenors tasked with the role of representing consumers in the process of regulatory change.All this is essential because the regulatory issues are complex. Just for example:A more detailed set of criteria for qualification to offer dispute resolution services will need to be developed to be applied to any applicant dispute resolvers, and this can only be responsibly accomplished once the complete expectations and responsibilities in regulation of these services is well understood.A methodology to ensure dispute resolution awards get paid to consumers will need to be developed for public consideration with uncertain consequences for any service provider.Because consumers are highly mobile within Canada, FCAC’s supervision and regulation of dispute resolution in banking should assume a basic need of consumers to obtain equitable, fair and easy-to-comprehend-and-access external dispute resolution and redress operated in a way uncluttered in its presentation of service by competing jurisdictional claims. The vision of achieving this should be as through the eyes of consumers.The Consumers Council of Canada believes adherence to the preceding points would help protect consumers from an unnecessarily confusing, complicated and increasingly costly situation created by the unreasonable actions of two banks.

INVESTOR ROUNDTABLEVideo: Is it crazy to invest in banks right now?“While we understand the government’s desire to identify and deal with systemic issues within banks, we believe that existing measures … already accomplish that objective,” the CBA said in the letter, filed in response to recent proposed federal changes to consumer complaints regulations.

The lobby group said it isn’t sure what kinds of systemic issues the government has in mind, but that the financial institutions involved should determine if there’s any need to report problems to federal officials.

But consumer advocates say there are plenty of practices that may be harming customers, including unwanted account charges, excessive mortgage prepayment fees or the unauthorized reopening of so-called “zombie accounts” when automated payments appear after an account is closed.

“These issues don’t come to light if no one is identifying them. We’re never going to know,” explained Ermanno Pascutto, former head of the Ontario Securities Commission and now executive director of the Canadian Foundation for the Advancement of Investor Rights.

In July, federal Finance Minister Jim Flaherty announced a controversial plan to overhaul the regime that lets consumers seek compensation from an outside arbitrator when they believe they’ve been wronged. Among other things, Ottawa would enshrine the ability of individual banks to hire their own private dispute resolution company, bypassing the quasi-independent Ombudsman for Banking Services and Investments (OBSI) now used by most banks.

Under a threat from Ottawa to impose a federal arbitrator, OBSI was created in 2002 by the country’s banks, providing consumers a cheaper alternative than going to court. But the industry has never fully embraced its creation, with many banks seeing it as costly, overly intrusive and potentially embarrassing. Among other things, OBSI tracks system issues as well as which banks face the most complaints.

Two banks have already bailed out of OBSI – Royal Bank of Canada in 2008 and Toronto-Dominion last year. Both now use ADR Chambers, a private arbitrator that promises “fast and cheap” dispute resolution on its website.

Consumer advocates said the CBA’s latest submission marks a further attempt to weaken protection for Canadians.

Mr. Pascutto said it’s unclear who would track systemic problems if they aren’t flagged during the complaints process. The presumption is that it would fall to the Financial Consumer Agency of Canada, which has a mandate to make sure federally regulated financial institutions follow the law and promote financial literacy. But Mr. Pascutto said the federal organization is “not known for robust enforcement.”

Abusive practices have a tendency to spread if they’re not exposed, said John Lawford, a lawyer with the Ottawa-based Public Interest Advocacy Centre.

“If you don’t give the Finance department or the banks the opportunity to change practices, they’re going to repeat themselves forever, and consumers will pay the price,” Mr. Lawford explained. “The whole idea of the ombudsman is like a perfect net for catching these systemic issues. It’s an early warning system.”

Ottawa’s 30-day comment period of the dispute resolution regime ended last week.

(Advocate comment: What is unsaid here is that OBSI was acting properly in settlement discussions and asking banks to pay not only for wronged-customer-losses, but also to pay for lost opportunity costs during the time period covered. The banks were upset with this amount of fairness and walked away from the industry mandated ombudsman. I could be missing a detail or two here, but this was certainly part of the problem. Banks do not wish a fair and honest playing field if they can tilt it in their favour. That, after all is why we have the strongest banks in the world........they tilt the playing field.)

New Oversight for Banking ComplaintsJacqueline Shinfield and Dawn Jetten

On July 6, 2012, the Minister of Finance proposed regulations in respect of the resolution of complaints by bank customers. The draft Approved External Complaints Bodies (Banks and Authorized Foreign Banks) Regulations (the proposed Regulations) will be published in the Canada Gazette on July 13, 2012, with a 30-day comment period. The Department of Finance press release makes it clear that the government views these changes as establishing a necessary pro-consumer framework for dispute resolution in the banking sector.

While the principal purpose of the proposed Regulations is to establish a framework for the approval and ongoing business of external complaints bodies, the proposed Regulations also impose disclosure and notice requirements on banks and authorized foreign banks (referred to in this bulletin collectively as “banks”). In addition, changes to the procedures of external complaints bodies required by the proposed Regulations may necessitate amendments to the complaint handling policies and procedures of their bank members.

Despite numerous references to consumers in the press release and the Backgrounder provided by the Department of Finance, the complaints procedures requirements of the Bank Act and the complaints resolution process and reporting requirements of an external complaints body under the proposed Regulations are not limited to consumer complaints or complaints relating to non-compliance with the consumer provisions of the Bank Act. Banks should review compliance with these requirements outside of their consumer business.

BackgroundUnder the Bank Act, banks are required to establish procedures for dealing with complaints made by persons requesting or receiving products or services in Canada from the bank (customer complaints). Currently, the Minister has the power to designate a complaints body to deal with customer complaints and all banks would be required to be members of such designated complaints body. No such designation has been made. Amendments to the Bank Act, which will come into effect together with the proposed Regulations, will allow the Minster to approve external complaints bodies and a bank will be required to be a member of one approved external complaints body.

The Ombudsman for Banking Services and Investments (OBSI) was established more than 15 years ago as Canada’s independent financial ombudsman service. However, membership in OBSI is currently voluntary for banks and two Canadian banks are now using the services of the privately owned ADR Chambers Banking Ombuds Office (ADRCBO). In the absence of any regulatory requirements, the OBSI and ADRCBO have established their own terms of reference and procedures for reviewing and resolving complaints and they are not subject to regulatory oversight.

With the introduction of the proposed Regulations, there will finally be a process in place for approval of complaints bodies by the Minister on the recommendation of the Commissioner of the Financial Consumer Agency of Canada (FCAC). Notwithstanding strong opposition by the OBSI, the proposed Regulations allow a privately owned complaints body to become approved as an external complaints body.

The stated purpose of the proposed Regulations is to enhance the process of dealing with complaints under the Bank Act by establishing a scheme for external complaints bodies. External complaints bodies are to be accessible, accountable, impartial and independent and must discharge their duties in a manner that is timely and co-operative.

Pursuant to the Bank Act and the proposed Regulations, the FCAC will have these external complaints bodies within its regulatory ambit. This further expands the types of entities over which the FCAC has jurisdiction, to include not only banks and other federally regulated financial institutions, but also payment networks and now external complaint bodies.

Application RequirementsThe proposed Regulations require a proposed external complaints body to have a reputation for being operated in a manner that is consistent with the standards of good character and integrity. A complaints body that intends to apply for approval must, prior to submitting an application, have policies and procedures as well as terms of reference that govern its functions as an external complaints body. Moreover, these policies and procedures must address the prescriptive requirements specified in the proposed Regulations.

Given the Commissioner’s role in recommending applications for approval by the Minister, applications will be made to the FCAC. The Backgrounder provided by the Department of Finance with the proposed Regulations indicates that the FCAC will consult shortly on how the application process will work.

making their services available free of charge in both English and French;ensuring that any person appointed by the external complaints body to resolve a complaint is impartial and independent to the parties to the complaint;notifying persons who have made complaints within 30 days if all or part of the complaint is outside of the external complaint body’s terms of reference;advising the FCAC without delay if the external complaints body determines that a systemic issue is raised by a complaint;dealing with and resolving a complaint in a manner that only affects the parties to the complaint; andresolving complaints by making a final recommendation within 120 days after the date the complaint was originally received.The requirements set out above seek to provide individuals with a more timely resolution of their complaints by requiring an external complaints body to provide notice within 30 days if a complaint received by it is outside of its mandate and to resolve any complaints within its mandate within 120 days. These are more specific and shorter deadlines than are currently stated on the OBSI and ADRCBO websites.

Administrative RequirementsUnder the proposed Regulations, external complaints bodies are required to comply with various administrative requirements in their handling of complaints. For example, at least once a year, an external complaints body must consult with bank members, as well as with persons who have made complaints since the previous consultation, in respect of the discharge of its functions and the performance of its activities.

Unfortunately, there is no guidance on the scope of this consultation process and it is not clear if the proposed Regulations require the external complaints body to consult with all persons who have filed complaints over the last year or if only a random sampling will be sufficient.

External complaints bodies will be required to submit an annual report to the Commissioner of the FCAC on the discharge of their functions and activities, including a summary of the results of the annual consultation process. This report is also to be made available to the public “without delay”.

In addition to the annual report, an external complaint bodies will be required to have a third party evaluate the performance of its activities every five years. This evaluation is to be done in accordance with terms of reference to be established in consultation with the Commissioner of the FCAC.

An external complaints body will also be required to make available to the public the following information:

information about the identity of its members;information about its constitution and governance and the terms of reference that govern its functions;information about all sources of funding for its activities including the fees charged to its members and how those fees are calculated; andinformation in respect of the results of its five-year evaluation.All information that is to be provided under the Regulations must be provided in language that is clear, simple and not misleading.

Effect on BanksThe Regulations define a complaint as a complaint made to an external complaints body by a “person” about a “product or service” that was requested or received by the person from a member of that body. The term “person” is defined in the Bank Act to include an “entity”. Accordingly, the proposed Regulations apply to complaints made by businesses in respect of commercial products and services, in addition to complaints made by consumers. This accords with the Bank Act requirements with respect to procedures for dealing with complaints, which are not limited to consumer complaints.

The Backgrounder provided by the Department of Finance with the proposed Regulations contemplates that the FCAC will be consulting shortly on proposed guidelines to clarify expectations for banks’ internal complaint handling procedures.

Once the proposed Regulations are finalized, each bank will need to review the complaints procedures for the external complaints body of which it is a member to check if any changes to its own complaints handling policies and procedures are required. The rules with respect to federally regulated trust and loan companies are somewhat different, but those that are members of an external complaints body will also have to conduct such a review.

Under the FCAC compliance regime, banks are currently required to report systemic issues in respect of the consumer provisions of the Bank Act to the FCAC within 60 days of such an issue being identified. The FCAC views a systemic issue as a compliance issue that could affect multiple consumers and/or could potentially have market-wide implications. Banks should note that external complaint bodies will be required to advise the FCAC immediately of systemic issues identified through complaints. By requiring external complaints bodies to report what they perceive as systemic issues to the FCAC, the FCAC will be provided with even more information on banks and their internal practices, including information on potential systemic issues that are not related to the consumer provisions of the Bank Act, and the FCAC may even receive such information before the bank itself has reported the issue to the FCAC.

Effective DateAs drafted, the proposed Regulations will be effective when registered. However, the timing of the related amendments to the Bank Act and the effective date of the final Regulations will need to be co-ordinated to allow time for applications for approval of external complaints bodies – including development of the application process by the FCAC, preparation and implementation of the required policies and procedures by complaints bodies and receipt of Ministerial approval – and any necessary amendments to bank policies and procedures.

Landmark court decision approving brokerage arbitration system caught attention of other industries; 'no place to go'

May 4, 2012American business entered its Teflon era on a spring day 25 years ago.

Lawyer Madelaine Eppenstein had taken the morning off from work for a parent-teacher event at her 5-year-old's elementary school on June 8, 1987, when she was summoned to the principal's office for an urgent call. Her husband and law partner, Theodore Eppenstein, told her they lost the Supreme Court case he had argued two months before on behalf of a couple trying to sue their stockbroker for fraud.

“I felt like I got punched in the face,” she told me in an interview late last month.

If Eppenstein was punched, the investing public was mauled. The case known as Shearson v. McMahon would wind up locking investors out of U.S. courts any time they tried to sue a broker. A tiny clause in customer agreements turned out to be Wall Street's magic formula to keep its transgressions out of sight. The agreement that Eugene and Julia McMahon signed said that any dispute between them and their broker at Shearson/American Express Inc. -- a trusted fellow parishioner at their church --“shall be settled by arbitration” in a Wall Street forum. Investors since then have either had to agree to similar terms, or forget about having a securities account.

“If you get screwed,” Theodore Eppenstein says, “now you have no place to go.”

Looking for Luxuries

No place to go, that is, if you're looking for luxuries like publicly filed documents, juries that hear the facts and judges that preside over open proceedings.

The McMahon decision was damaging enough for the impact it had on individual brokerage customers, who tell their stories about fraud, misrepresentation and churning behind closed doors where the public -- including reporters -- isn't welcome. Perhaps worse is what happens when a powerful industry gets accustomed to keeping its squabbles quiet: Wrongdoers are inclined to relax, sending ethics to ever-lower lows.

“It means that all sorts of scams against individuals, however large, are very unlikely to come to the attention of the media and the public,” says F. Paul Bland Jr., a senior attorney at the public-interest law firm Public Justice in Washington.

Wall Street may have been first to catch on to the benefits of mandatory arbitration, but Bland worries that the closed-door trials are spreading to industries from retailing to homebuilding. “The silence and secrecy that surrounds arbitration is extremely harmful to the country,” he says.

These days, employers -- Manpower Inc. and Nordstrom Inc. among them -- require new hires to give up their rights to court before a fresh-faced recruit can check in for orientation. And consumers can forget about opening a Netflix account, signing a mobile-phone contract, or putting a loved one into most big-name nursing homes unless they are willing to give up their rights to go to court. Buying a Starbucks gift card? You are agreeing to mandatory arbitration of any fraud or misrepresentation by the company.

The results can be chilling. After watching his father die from sepsis of the blood caused by infections from 13 bedsores in 2005, David W. Kurth of Burlington, Wisconsin, tried to sue the nursing home whose staff he claimed had left his father's wounds covered in excrement and urine for days at a time. Though the death of his father would have been shocking enough, Kurth told a Congressional subcommittee in 2008 that the “most shocking” part of his family's ordeal was this: They wouldn't be able to sue for the alleged neglect because the deceased man's wife had signed admissions documents that had a mandatory- arbitration agreement.

“How can anyone in good conscience argue that it should be perfectly legal to trick frail, elderly, infirm senior citizens experiencing the most stressful time in their lives into waiving their legal rights?” Kurth asked.

Free Phones

Conscience, of course, plays no role when companies demand arbitration. But Supreme Court decisions do. In April 2011, the court dealt a new blow to consumers and employees in a case known as AT&T Mobility v. Concepcion. AT&T had pitched a deal to woo new mobile-phone customers by offering free phones, but it turned out the freebie came with a $30.22 bill for “taxes.” Vincent and Liza Concepcion tried to bring a class-action lawsuit on behalf of all the other consumers who took AT&T's deal. But the court said that when the couple signed the customer agreement, they gave up their right not only to sue, but also to a class action even in arbitration.

In the year since the Concepcion decision, lower courts have trashed dozens of cases in which consumers or employees were trying to sue as a group. The National Labor Relations Board pushed back against the impact the Concepcion decision might have on employment class actions, ruling in January that it's a violation of federal labor law to make workers give up the right to pursue group claims. That decision probably will be challenged in court.

About 25 percent of U.S. employees are covered by mandatory-arbitration clauses, says Alexander J.S. Colvin, an associate professor of labor relations and conflict resolution at Cornell University. He figures the number will grow as a result of the Concepcion case.

If you are wondering just how bad arbitration can be, the examples are many. When I wrote my book about sexual harassment on Wall Street, “Tales From the Boom-Boom Room,” I was aghast at the things brokerage firms could do that would never be allowed in court. In the weeks before one woman's arbitration hearing was set to begin, her former employer hired a psychiatrist who questioned about her sex life and her menstrual cycle. She had alleged that a man in the office had followed her into a stock room and grabbed her breasts. Another woman, who said the same man had accosted her, was directed by the consultant-shrink to sit in a chair in the middle of a room and recite the names of all the U.S. presidents -- in reverse order.

Both women bailed out and settled, having seen enough of arbitration's downside before the hearings even started.

Get There Early

In October, a doctor who was fired from her job by a physicians' group in suburban Philadelphia told the tale of her arbitration to the Senate Judiciary Committee. Deborah Pierce would have preferred to sue the partnership (17 men, one woman at the time) that fired her, but her employment agreement tied her to arbitration run by the American Health Lawyers Association. One morning, she arrived early to her hearing at a law office in Wayne, Pennsylvania, to see one of her former bosses strolling out of the arbitrator's office carrying a cup of coffee. That sort of encounter is known as an ex-parte meeting between a judge and a party to a case. It isn't allowed in court proceedings.

To pay for her case, which included her half of the arbitrator's $117,042 fee, Pierce took out a home-equity loan that she and her husband are still paying off three years later. Her consolation prize: the arbitrator at one point ordered her adversaries to pay her $1,000 in sanctions for destroying documents and delaying the proceedings. And then, he billed her $2,000 for the time he spent deciding whether he should impose the fine. She lost.

It's an open secret in legal circles that arbitrators are more worried about alienating the corporations who give them regular business than they are about one-shot plaintiffs. “Arbitrators who ding a major firm know they're going to be blackballed,” says Timothy J. Dennin, a New York lawyer who represents aggrieved investors.

There are upsides to arbitration, if only the public had a chance to consider it as an alternative to court instead of a mandate. Investors whose losses are too small to be attractive to lawyers, for example, can often navigate securities arbitration more easily than a court case. And arbitration can be faster than court.

“Do some cases fare better in arbitration? Definitely,” says Ryan K. Bakhtiari, the president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors. He says arbitration should be at the choice of the investor, not mandatory.

Bad Behavior

The more cases we relegate to arbitration, the more we fail to hold companies accountable for bad behavior.

Frank Partnoy, the author of “Infectious Greed: How Deceit and Risk Corrupted the Financial Markets,” says that even if an arbitrator decides a business is guilty of fraud, a company “can write a check and not worry about creating a dangerous precedent.”

That case by the McMahons never got to arbitration after the Supreme Court said the couple couldn't go to court. Regulatory records for their former broker show they settled for $700,000. Christine Hines, the consumer and civil-justice counsel in Public Citizen's Congress Watch unit, says groups such as hers would simply have no material to work with if bad products and practices were all relegated to private justice.

“There is no way we, as advocates, would know what's going on,” she says.

Twenty-five years after the McMahons lost their fight for a public hearing, it's hard not to conclude that's precisely what business is counting on.

--Bloomberg News--

(Susan Antilla, who has written about Wall Street and business for three decades and is the author of “Tales From the Boom-Boom Room,” a book about sexual harassment at financial companies, is a Bloomberg View columnist. The opinions expressed are her own.)

Royal Bank of Canada's head office in downtown Toronto. RBC is one of the banks that pulled out of the Ombudsman for Banking Services and Investments. (NATHAN DENETTE/THE CANADIAN PRESS) A- A+The future of Canada’s national bank ombudsman is in peril as the country’s only independent office for consumer banking complaints looks at shutting down those operations after the departure of the country’s two largest financial institutions.Sources close to the Ombudsman for Banking Services and Investments (OBSI) say its board of directors has approved a scenario that would see the consumer banking complaints office closed unless Ottawa prevents banks from ignoring the service and choosing their own complaints handlers.RBC and TD raise mortgage rates, signal end to price warBanks should not have choice of dispute mediator: OmbudsmanStrengthen banking ombudsman, panel urgesRoyal Bank of Canada and Toronto-Dominion Bank have pulled out of OBSI, deciding instead to hire their own dispute resolution service for customer complaints, using arbitration firm ADR Chambers to handle problems with clients.According to sources, OBSI’s board feels the organization can no longer continue as a credible ombudsman if banks are allowed to leave if they are unhappy with its decisions. RBC pulled out of OBSI for consumer banking complaints in 2008, while TD announced it was leaving in November. Both banks are required to remain part of OBSI for their investment dealer operations.OBSI, a non-profit office that is funded by the industry but has independence from the banks, has been waiting for the Department of Finance to clarify whether banks can opt out of the federal ombudsman process and employ their own complaint-handling services, which are funded directly by the financial institution.However, with no word on forthcoming regulations, the office has started to consider other scenarios for its future, sources say.OBSI was created in 1996 at the suggestion of the banks, which preferred the arrangement of an industry ombudsman rather than a formal government department. Though the banks fund OBSI, no single institution holds sway over its decisions. All complaints that a customer can’t resolve with the bank’s internal complaints officer are elevated to OBSI.The ombudsman handles files ranging from disagreements over penalties associated with cancelling a mortgage, to complaints over missing money in accounts.However, friction has built between OBSI and RBC and TD over the years. The banks say they were upset with the length of time it took to resolve problems. As well, sources indicate the banks were upset about the financial settlements OBSI required them to pay, and for the powers the ombudsman wielded.In the 2010 budget, Finance Minister Jim Flaherty announced that Ottawa would require the banks to belong to an “approved” third-party ombudsman, but did not stipulate that it needed to be OBSI. The banks interpreted this as permission to use their own arbitrators.Industry watchers are looking to Thursday’s federal budget, where Mr. Flaherty could seek to clarify the matter, but there is no indication the government will move on the issue. Several sources within the industry say a two-year wait for regulations has baffled banks and OBSI alike.A spokeswoman for the Department of Finance said Monday night that the matter is a concern for the government.“Currently, all banks are required to have a consumer complaints procedure in place and have a third-party dispute handling body. However, there is a variation in procedures used. This is a source of concern for us and more importantly, for consumers,” Mary Ann Dewey-Plante, spokeswoman for Mr. Flaherty, said in a statement.Ottawa wants banks to use government-approved dispute resolution services, Ms. Dewey-Plante said. The statement suggests financial institutions may be able to choose their own complaints adjudicator, as long as it is sanctioned by the government.“We have passed legislation forcing banks to belong to government-approved, independent third-party bodies; establishing uniform regulatory standards for internal complaints procedures and giving the Financial Consumer Agency of Canada the authority to monitor as well as enforce compliance. We are now finalizing regulations,” the statement said.A call to OBSI board chairwoman Peggy-Anne Browne was not returned. Officials with the ombudsman’s office would not comment on the potential of shutting down the consumer banking complaints office, but provided a brief e-mailed statement.“We believe that Canadians deserve a banking dispute resolution system that is independent and impartial, and not beholden to any one stakeholder group,” OBSI spokesman Tyler Fleming said in the statement. “There are regular Board discussions around scenario planning that take place, but we remain optimistic that the integrity of the system will be restored and that RBC and TD will once again participate in OBSI for banking complaints.”Should OBSI close down its consumer banking complaints arm, it would still continue handling disputes involving investments for customers of each of the banks.The move comes after OBSI chief executive officer Douglas Melville appeared before the House of Commons finance committee last week to discuss the bank’s decision to use their own mediators – a move he said gives all the power to the financial institution” and none to the consumer.“We are literally the only avenue for consumers to get compensation in the event of a problem caused by their bank, outside of the courts,” Mr. Melville said. “A service hired by the bank and that, consequently has the bank as a client, creates the perception, if not the reality, of a loss of critical independence. The service will know who it is they need to please in order to keep the business, and it’s not the individual making the complaint. It is a clear conflict of interest.”While RBC and TD have decided to opt out of using OBSI, other banks say they have no plans to leave. Bank of Nova Scotia said in a statement Monday that it would remain in the organization. “We believe in the value of an objective point of escalation for customer care and we don’t have any immediate plans to change,” Scotiabank spokeswoman Ann De Rabbie said.